Still More on the Game-Changer Narrative

by jboullion | Feb 19, 2014 | Uncategorized

Note: This update follows my commentary posted two weeks ago documenting emerging changes in the U.S. natural gas market picture.  It is my thesis that the current understanding of supply and demand trends leaves us unprepared for nonlinear events like this winter’s weather.  
–Michael Vickerman

There is nothing quite like a long stretch of below-normal temperatures to stoke the heating fuel markets. Last week (February 13) the Energy Information Agency reported a withdrawal of 237 billion cubic feet (bcf) from inventories, a 12% decline from the previous week’s level.  As indicated in the table below, inventories have shrunk to 1,686 bcf.

It’s a safe bet that this week’s withdrawal number will be even larger than last week’s total, which would send storage volumes below 1,500 bcf. It’s worth remembering that there is at least six weeks left in the current heating season. For comparison purposes, the previous heating season ended in the second week of April with inventories down to 1,673 bcf. This has already been a winter to remember, and it’s not over by a long shot.

It is finally dawning on traders that supplies are the tightest they’ve been since the 2003-2004 winter. Prices have now breached the $5.00/MMBtu mark and may climb some more. However, it will take more than a brief foray into $5.00+ territory to sustain extraction activity at a level that can fully replenish inventories in time for the next heating season. And, as noted in my original commentary, current prices are still low relative to 2007-2008 levels, and are unlikely to induce significant reductions in demand.

As reported in the February 14, 2014, edition of Ravenna Capital Management’s  The Master Resource Report, Conoco Phillips has no immediate plans to jump-start exploration and extraction activity based on recent market conditions.

ConocoPhillips wants benchmark natural gas prices to remain over $5 for as long as two years before the company boosts spending on natural gas, Chief Financial Officer Jeff Sheets said in a Jan. 30 interview.


“We won’t be leaders in getting out there and drilling natural gas,” he said.

I strongly encourage readers of this blog to check in weekly with The Master Resource Report, an educational newsletter written by Jim Hansen of KMS Financial Services. Jim is a keen observer of energy markets and has been tracking the emerging disconnects in the domestic natural gas market since the summer of 2013. 

I’ll send out another update in a week. In the meantime, let’s celebrate today’s foretaste of spring weather, while Mother Nature slaves away on the next winter storm rolling our way.

Time to scrap the shale gas “game-changer” myth

by jboullion | Jan 31, 2014 | Uncategorized

A commentary by Michael Vickerman

As this latest blast of arctic air slides away from the Upper Midwest, now is a good time to take stock of the conventional wisdom that grips natural gas markets today.

The Energy Information Administration (EIA) last week reported another large weekly withdrawal of natural gas–230 billion cubic feet (bcf)–from underground inventories. While this is a big number, it is well short of the record-setting 287 bcf withdrawal reported two weeks earlier. This week’s report may eclipse that number.

The heavy demand for natural gas this winter leaves inventories at their lowest levels for this time of year since 2004.  Even if temperatures returned to normal this February and March, we could finish the heating season with only one-third the volume in storage back in early November.

Remember the extraordinary surplus that accumulated in the winter of 2011-2012? It’s ancient history now. Without a moment’s thought to what was happening, we managed to Hoover through every last cubic foot of ballooning inventories that in 2012 sent gas prices plunging down to levels not seen since 2002. One month into 2014, the pendulum has clearly swung over to the deficit side of the supply-demand equilibrium.

The problem is less a shortage of supply—domestic extraction volumes have risen nearly 50 percent in a mere eight years—than an accelerating “longage” of demand.  Notwithstanding the sluggish economy, baseline consumption is rising, stoked by low commodity prices that discourage conservation efforts and a growing supply of residences and businesses to heat.  Even though power companies scaled back their use of natural gas in 2013, overall gas consumption rose 2 percent from 2012 levels, according to EIA estimates.

Stir into that dynamic the coldest winter in the Upper Midwest this century and spice it with slowing production growth reported last year, and you have all but one of the ingredients needed for a dramatic upward re-pricing of this precious energy resource.

What is the missing ingredient here? A new narrative to combat the “shale gas miracle” myth that has been drummed into every adult American’s brain and belief system, courtesy of a well-financed and expertly orchestrated public relations campaign sponsored by the fossil energy industry.

Most Americans now believe that there is enough recoverable natural gas lurking under our feet to heat and power this country well into the next century. A fairy tale to be sure, but as long as it is one we believe to be true, we will have trouble recognizing the signals that tell us that the supply-demand picture is tightening.

Let’s focus on the supply picture for a moment. Did anyone notice that natural gas extraction volumes rose by only 1 percent in 2013? This was “the lowest annual growth since 2005,” the EIA wrote, noting also that “this production growth was essentially flat when compared to the 5 percent growth in 2012 and the 7 percent growth in 2011.” That modest bump failed to keep pace with EIA’s estimate for increased gas usage last year.

In spite of the recent record-setting withdrawals, the price of natural gas, now around $5.00 per MMBtu, is substantially below the $8.00 threshold that it sold for in January 2008, even though the amount of gas in storage then was 13 percent higher than today’s volumes.

One market analyst who clearly hasn’t noticed the changing picture told Bloomberg reporter Christine Buurma earlier this week that “the U.S. market remains awash in gas,” and dismissed the recent price rally as “transitory and not sustainable.”  This analyst believes that prices could drop back to $4.00, a level widely thought several months ago to represent the price ceiling for this commodity.

Not to be outdone, another market analyst predicted a retreat to $3.00 prices by 2016. How this resurgence of supply can be accomplished when prices are dropping is not explained.
Here we see the power of the shale gas “game-changer” myth. Output growth is slackening and weather-related demand is spiking, yet energy analysts and market commentators still expect 2014’s prices to conform to the pattern set several years ago, when we were truly awash in gas.

While the rock bottom prices of 2012 proved very effective in working supplies back down to normal levels, they have also motivated energy companies to conserve cash, cut their exploration budgets, and squeeze as much product as possible from known reserves.  Having operated in survival mode since the great gas bubble of 2012, these firms are too cash-strapped to ramp up exploration and extraction activity. What they would need to make that happen is, first and foremost, a return to 2008-level prices.

What is not sustainable for much longer is $4.00 natural gas, especially in light of certain physical and economic realities, such as:

• Steep decline rates in the output from wells tapping into shale gas released by hydraulic fracturing (“fracking”);
• Continuing expansion of gas-fired generating capacity substituting for coal and nuclear power plants now being retired; and
• Accelerating investments in infrastructure to liquefy domestically produced natural gas for export to Europe and Asia, which would bring to bear global pricing pressures on a commodity currently enjoying a substantial discount relative to overseas markets.

On the last point, for a taste of what global pricing pressure can do to a formerly low-cost energy source, observe the supply-demand-pricing dynamic that is now sending Midwest propane markets into gyrations. True, a number of unforeseeable events, some of them weather-related, converged to elevate propane use over the last six months, but in a globalized market, the people who can pay the most for a valuable commodity are often not the ones who need it the most.
Anyone who has ever watched a football game in January knows that subzero temperatures can be a game-changer, too. Perhaps this remarkable stretch of winter weather will be just the thing to pierce through the veil of wishful thinking and comforting fairy tales that undermine our collective ability to face our uncertain energy future, and to make all necessary preparations.

Midwest faces propane shortage, increase in prices

by jboullion | Jan 30, 2014 | Uncategorized

A recent propane shortage in the Midwest has led to a fivefold increase in prices. The Midwest has the nation’s highest share of propane users, many of which are in rural areas. Responding to this volatile situation, the governors of Illinois, Minnesota, Ohio, and Wisconsin have declared state of emergencies.

One explanation being offered for the shortage is exportation. While domestic propane production has actually increased over the past five years, the amount of barrels exported has grown significantly.

Click here for a further analysis of the Midwest’s propane shortage.